413sol2-04 - Chapter 2: Income Tax Concepts 2-1 _ CHAPTER 2...

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Chapter 2: Income Tax Concepts 2-1 ___________________________________________________________________ CHAPTER 2 INCOME TAX CONCEPTS __________________________________________________________________ DISCUSSION QUESTIONS 1. This chapter compared the operation of the income tax system with the operation of other systems we have devised to govern our everyday lives. Choose an example of a system you deal with in your everyday life, and explain part of its operation in terms of concepts, constructs, and exceptions to the general concepts and constructs. There are several possibilities for student response to this problem. The key point is that they identify a system, a concept underlying the system with a related construct, and an exception to the concept. For example, the University Library operates under the general concept that everyone should have access to the materials in the library. A construct related to this concept is that some materials may be checked out for a period of time (two weeks for example), while other types of materials may not be checked out at all (the exception to the construct). Another exception to the check-out rules may be made for faculty: faculty may have longer check-out periods and may be able to check out materials that other users cannot. 2. The chapter stated that the ability-to-pay concept is fundamental to the operation of the income tax system. What is the ability-to-pay concept, and what two basic aspects of the income tax system are derived from the concept? What might the tax system be like without this concept? The ability-to-pay concept states that the tax paid should be related to the amount that the taxpayer has to pay the tax. This concept is implemented by using taxable income (income net of deductions) as the tax base for figuring the tax. This gives recognition to differing levels of income as well as differing levels of deductions by each taxpayer. The second aspect is the use of progressive tax rates in the calculation of the tax. This rate structure imposes lower tax rates on lower income levels while taxing higher levels of income at higher rates. Without this concept, the income tax could be very different. First, a different tax base could be used, such as a tax on all income received. In addition, the tax rate structure might not be progressive. For example, a tax on all income received might be subject to a single tax rate (proportional tax structure). 3. What is an arm's-length transaction? What is its significance to income taxation? An arm's-length transaction is one in which the parties to the transaction bargain in good faith for their individual benefit, not for the mutual benefit of the group.
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413sol2-04 - Chapter 2: Income Tax Concepts 2-1 _ CHAPTER 2...

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